Guernsey:
A Solid Foundation For The Future

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Fiona Le Poidevin, Chief Executive of Guernsey Finance,
looks at the Island's introduction of its own foundations
legislation.

Guernsey lies on a bedrock of granite, a strong foundation
material which in the past was exported to London for many uses,
including the building of the granite steps in front of St
Paul's Cathedral and the repaving of London Bridge. In the
present day, Guernsey is exporting a new kind of foundation to the
City and beyond. On 25th July 2012, the States of Guernsey, the
Guernsey parliament, approved The Foundations (Guernsey) Law, 2012.
It is currently awaiting Royal Assent from the Privy Council and
this is expected to be received in either late 2012 or early 2013.
As we shall see below, the Guernsey Foundation creates a unique
proposition in managing the wealth of clients.

Why foundations?

At the end of 2004, the Economic Development Unit of the
Commerce and Employment Department of the States of Guernsey set up
a Trust Law Revision Working Party. The working party consulted on
introducing foundations in Guernsey and there was overwhelming
support for the idea. It was approved, in principle, by the States
of Guernsey but the immediate focus was modifying the trust law,
which led to The Trusts (Guernsey) Law, 2007 and this was followed
by a major shake-up of Guernsey's company legislation through
The Companies (Guernsey) Law, 2008. However, while progress was
slowed by other priorities, some concerns were also raised about
foundations.

One was that introducing foundations into our law was
denigrating the value of trusts or otherwise diluting the message
that Guernsey is a centre for trust administration. However, there
is little you can do with one that you cannot do with the other. In
addition, there are already a number of foundations that have been
established elsewhere which are administered in Guernsey and this
is because we are renowned for administration excellence, whether
for trusts, companies, partnerships or foundations.

Others questioned whether the Island's reputation may be
tarnished by introducing an entity that for some is tainted by
association with some of the jurisdictions from which they have
historically been provided. Ultimately, there was recognition that
foundations per se were not flawed but rather there were systemic
problems in some of those jurisdictions which have historically
offer foundation solutions. In fact, it was viewed that there was
an opportunity to offer foundations from a jurisdiction which
adopts leading international standards of regulation, cooperation,
tax transparency and exchange of information.

However, perhaps the most compelling arguments for adopting the
foundation were precisely because Guernsey was renowned for the
trust. The trust is a common-law concept which is familiar to those
in the Anglo-Saxon world of the UK, US and Canada, for example, but
is less well understood in civil law jurisdictions such as
continental Europe and some of the 'emerging' markets which
are the major sources of new private and corporate wealth.

Guernsey's introduction of the foundation would provide
clients with the ability to use the Island even if they were
uncomfortable with a trust. It would also provide an added level of
flexibility to service providers who would have an extra tool on
the menu of options available for best meeting client needs while
still using Guernsey structures.

What is more, many European critics of Guernsey as a
jurisdiction regard the trust with some suspicion. They also
struggle to understand how a trust can exist if it is not
registered anywhere. Guernsey foundations will be registered, with
certain - albeit limited - information of that registration
available to the public.

In essence, the introduction of foundations in Guernsey made
sense both commercially and from a reputational standpoint.

High standards

Following final approval of the law by the States of Guernsey in
July, Guernsey Finance held a seminar in London to explain the new
legislation to 120 delegates, including the leading legal and tax
advisers from city's private client community. The session was
moderated by Russell Clark from Carey Olsen and panellists were
Richard Pease of Lenz & Staehelin, Elizabeth Henson from PwC
and Gavin Ferguson of Appleby, while Filippo Noseda of Withers gave
his thoughts on the new law via a pre-recorded video
commentary.

What Filippo emphasised was that there are many clients and
their advisers who want a foundation solution, rather than a trust.
While some would prefer one from a civil law country, others would
prefer one from a jurisdiction, such as Guernsey, which, although
renowned for administering trusts, in doing so had built up
considerable infrastructure and expertise in managing the wealth of
private clients.

Indeed, Guernsey has over 50 years' experience in wealth
management. Today, there are 154 lead corporate fiduciary licensees
(as well as nearly 40 licensed individuals, who can act as
directors, co-trustees or trust protectors). These range from
multinational organisations to independent, locally-owned firms,
who in total employ more than 2,000 members of staff.

The fiduciaries are also complemented by the broader financial
services industry in the Island, including banking, investment and
insurance sectors as well as a strong network of professional
support services, including multi-jurisdictional law firms and
global accountancy practices. In addition, Guernsey has a long
standing and well respected judicial infrastructure which is
experienced in dealing with fiduciary matters.

It is for these reasons, combined with the Island's
reputation for high standards in regulation and tax transparency,
that Filippo believes Guernsey will be a foundations destination
for quality business. What I am hearing from a number of local
practitioners is that they have had inquiries from clients who have
foundations currently domiciled in other jurisdictions but they are
now considering the migration of these to Guernsey once the
legislation is enacted. This is principally due to the specific
provisions of the new law but also due to the heritage we have in
providing trust and corporate services as well as, of course, our
reputation for being a well regulated and tax transparent
international finance centre.

We do not necessarily expect a flurry of activity, with huge
numbers of new foundations being established but we are looking at
quality and not just quantity. Indeed, we believe that our
expertise in servicing private clients means that we are especially
well placed to administer complex structures and in particular,
where they are for philanthropic purposes. Obviously, we are not
saying that a foundation, as opposed to a trust, is always the
right option or that a Guernsey foundation is always going to be
the most appropriate route but we believe that it does offer some
important advantages over others already in the market.

Unique features

The Guernsey foundation is an incorporated entity with a
separate legal personality. As such, on face value, it looks more
like a company than a trust. However, unlike a company, it does not
have shareholders to whom the board are accountable. Instead, the
foundation holds assets (in its own name) on behalf of
beneficiaries, particular purposes, or both, in accordance with the
foundation's constitution. Therefore, although it looks similar
to a company, its operation is more akin to that of a trust.
However, a foundation is neither.

The foundation's constitution comprises a charter setting
out the foundation's purposes, initial assets and duration
(which may be unlimited) as well as rules prescribing, among other
things, the functions of the council and procedures they must
follow. There are no 'trustees' and instead, council
members perform a similar role by having a duty to the foundation
to act in good faith, and cannot, without express authorisation,
profit directly or indirectly from their position.

Guernsey has taken note of the fact that some clients may worry
about confidentiality because as foundations are registered
entities, they are, unlike trusts, publicly visible. In Guernsey,
limited details are available to the public (although full
disclosure must be made to the registrar) whereas in other
jurisdictions such as Jersey and the Isle of Man, the whole charter
is commonly visible. Yet, Guernsey's approach also means that
this limited visibility offers the benefit of being able to prove
the foundation's existence quickly when dealing with third
parties.

In drawing up their foundations legislation, Jersey specifically
set out to provide a wealth management product that could
legitimately meet the needs of clients who wanted to retain more
direction or power over their assets than the trustees of
discretionary trusts would normally permit settlors. Filippo has
said that he found this particularly interesting considering that
many common law jurisdictions have taken steps to strengthen
reserved settlor powers within their trust provisions. He also
queries whether foreign tax authorities might view such
arrangements as effectively a corporate structure and therefore
subject to the corresponding tax treatment.

Filippo goes on to say that in Guernsey, the founder's role
is flexible but perhaps more restrictive than in Jersey. However,
Guernsey has taken an approach which will be more familiar to those
versed in the traditional civil law model where the foundation not
only has a separate legal personality, like a company, but also a
legal personality that is independent of the founder. This may also
help to clarify the appropriate tax treatment for the founder in
their own country of residence.

A particular innovation of the Guernsey foundation is the
ability for beneficiaries to be classed as either being
'enfranchised' or 'disenfranchised'. Enfranchised
beneficiaries will have rights to certain information regarding the
foundation, whereas disenfranchised beneficiaries are not entitled
to any at all. Where there are disenfranchised beneficiaries then
the foundation is required to have a guardian. Their role is
similar to that of an enforcer of a purpose trust, with a duty to
act in good faith and en bon père de famille.

Practicalities

This article has only had a chance to explore some the key
features of what makes a Guernsey foundation particularly unique.
However, I hope that you have been able to at least get an
indication as to the way in which we believe the particular
provisions relating to confidentiality and control mean that the
Guernsey foundation is a very useful structure for asset
protection, wealth planning and dynastic planning.

We believe that these provisions, combined with the Island's
high reputation and service standards, mean that Guernsey will see
foundations being established in relation to sophisticated and
quality business, such as for philanthropic purposes. There is the
benefit that the foundation's purpose does not have to be
exclusively charitable, so the vehicle can be more flexible than
the charitable trust.

A foundation is also useful for corporate entities looking to
create an orphan structure where the assets of a particular entity
can be held in a foundation, rather than having a parent company
and being an asset on that company's balance sheet. This means
that the foundation may be used in fund structuring as well as
other corporate purposes, including subordinated debt, private
equity structuring and providing employee benefits.

We're not saying that a foundation or indeed a Guernsey
foundation is always most appropriate to meet a client's
need.

However, we do believe that the Guernsey foundation - the
combination of the jurisdiction and specific provisions in the new
law - can offer benefits compared to others already in the market.
We believe it will be particularly attractive to clients from
continental Europe but also those in civil law jurisdictions
further afield in the 'emerging' markets, such as Russia,
Latin America and Asia, specifically China. Indeed, I have just
returned from a two-week visit to Hong Kong, Shanghai and Beijing
and already there is significant interest in how Guernsey
foundations can benefit Asian clients.

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